Immediate Annuities – Life Insurance Reversed

Immediate annuities do not qualify as a pre-retirement provision plan. It is rather for people facing the reality of retirement. An attempt to make your available funds last a lifetime.

We all understand life insurance. You pay a monthly premium that increases annually to keep pace with inflation for a lump sum to be paid into your estate at your death. That lump sum will hopefully take care of any outstanding debt at that time.

Here the process is reversed. You use a lump sum to buy a pension from an insurance company. You buy peace of mind. You don't worry that the insurance company will score if you don't live much longer because you know that they will honor their commitment and pay the pension even if you live to a hundred and ten!

That's how the insurance company can offer this product. It is statistically calculated to even out. The unused portion of the lump sum paid by retirees that die early subsidize the pensions paid to longer living retirees.

However, it is not all as simple as that. You need to choose between fixed annuities, variable annuities, and inflation adjusted annuities. The payout rate for inflation adjusted annuities would be the lowest, but it will keep pace with your costs even during run-away inflation periods.

The payout rate is also influenced by your age when you buy your pension, and you being male or female because statistically females live longer than males and will draw a pension for a longer period. The payout rate for married couples would also differ.

Furthermore you need to get quotes from several insurance companies because their payout rates for the same lump sum do differ. But make sure that you feel comfortable that the company you choose will be around in twenty years' time!

You might want to consider a Swiss Annuity too. The link to our discussion of Swiss Pensions will open in a new window.

In spite of huge interest in immediate annuities, very few people bought it historically. We have a separate discussion around the phenomenon of annuitization. The link opens in a new window.

It is perhaps not necessary to use all your retirement savings to buy a pension. If you calculate how much you need monthly and you deduct from that your monthly social security benefit you'll come up with the monthly amount that you need from a pension. If you have the funds to buy a pension that will cover that amount for life, you buy peace of mind.